What Are the Economic Effects of Climate Change?

What are the consequences of environmental changes on human life?

In recent years climate change has become synonymous to global warming. But the climate has more variables than just the temperature. Moreover, when one asks what impact climate change has on human life one has to take into consideration the connection between various climate variables (such as temperature or the amount of precipitations) and human activities (such as agriculture).

The scientists studying the climate point out to the fact that temperature has risen considerably in the last decades comparatively to the last 1,000 years - this is what the "hockey stick" graph shows. The most plausible reason for this dramatic increase is human activities particularly the emissions of green house gases (carbon dioxide and of a lesser importance methane). (Although some argue that the cause is the Tunguska event.)

On the other hand, economists point out to other trends. For example the change in the human life expectancy during the last 10,000 years also has a dramatic hockey stick shape. Julian Simon's book The State of Humanity compiles a large number of studies concerned with various indicators of the human standard of living and virtually all of them show similar hockey stick trends. Why should we let the climatologist's hockey stick blind us and not see them as well? They conclude that, as long as economic freedom is preserved, such trends are likely to continue."Progress toward a more abundant material life does not come like manna from heaven, however," Simon wrote in his introduction. "My message certainly is not one of complacency. In this I agree with the doomsayers: our world needs the best efforts of all humanity to improve our lot. I part company with the doomsayers in that they expect us to come to a bad end despite the efforts we make, whereas I expect the continuation of humanity's history of successful efforts. And I believe their message is self-fulfilling, because if you expect your efforts to fail because of inexorable natural limits, then you are likely to feel resigned, and therefore literally resign. But if you recognize the possibility - in fact the probability - of success, you can tap large reservoirs of energy and enthusiasm."

The debate around climate change often has climatologists accusing the economists of being ignorant of climate science and economists accusing the climatologists of being ignorant of economic science. In an article last week for example The Economist writes of Sir Stern's report on climate change: "Rarely has a report with so many charts and equations in it caused such a stir. Sir Nicholas Stern's review of the economics of climate change, published on October 30th, was all over the local media and much of the foreign press too. But the figures splattered over the report's 600 pages were something of a red herring, for the report was more about politics than about economics - specifically, the politics of getting America involved in the global effort to mitigate climate change."

"Most previous assessments of the cost of climate change to the world economy are relatively modest - in the order of 0-3% of global output," they write. "Sir Nicholas, however, comes up with quite different figures ... he calculates that the range of possible outcomes lies somewhere between 5% and 20% of global output over the next century or two. At those sorts of levels of overall economic damage, the impact on the rich world as well as the poor world is huge. Sir Nicholas's policy prescriptions, as well as his analysis, seem designed to draw America in."

In the end, the ultimate issue isn't whether the temperature rises or not, but what is the impact of such changes on human life. Perhaps the fact that the world changes, and it's doing it at rapid pace, is much more familiar to economists than to climatologists. That's what their science is all about - how people react to changes, how they produce changes and what are the economic conditions that assure the changes are usually for the better. Economics isn't about how to adapt to a fixed environment but how to adapt the environment to our ever growing desires. But can it be that the economists are now missing something big?

To fill the gap between the climatic changes per se and their economic consequences climatologists have reported various connections between temperature changes and natural disasters. For example the frequency of the hurricanes depends on temperature, so an increase in temperature causes an increase in hurricanes. (Read more.) Similar studies have linked global warming to wild fires. In 2001, the insurance giant Swiss Re estimated in a report commissioned by the United Nations that an increase in natural disasters as a result of global warming could cost the world over 300 billion dollars annually by the year 2050.

One way to look at this figure is to say that it's awful and that we should just stop doing what we're doing because it leads to disaster. Another way is to say that it is a very good reason why we should not take steps that hamper economic progress and, implicitly, our capacity to cope with such figures. And after all, to an economist these figures are mainly Swiss Re's problem and they will naturally be reflected into the increasing cost of insurance. They are not ignored. Even if the issue of global warming would have been an obscure scientific finding, the insurance companies would surely still have worried about it. But how about those areas of the world where insurance companies don't adventure? Would they be stuck with the bill?

One of the most important questions to ask is how climate change affects the agriculture. Various studies have shown that a dire future awaits Africa. As the mountain glaciers melt completely (as they are no longer replenished by snow) many regions will be left with substantial water shortages. (Read more: 1, 2)

But until recently climate studies were not able to properly model the impacts on agriculture because they only took temperature into consideration, while agriculture is most influenced by precipitations. "Even though the question often posed involves the impact of global warming on agriculture, the real question ought to be 'What is the effect of drought?'" said the Indiana state climatologist Dev Niyogi.

To change this situation Niyogi's team took into consideration four factors and their mutual interactions: temperature, radiation, precipitation and land use. Their study concluded that the lack of precipitation will have the most dramatic effect on living conditions in the future due to the impact on the sustainability of agricultural crops. Land use is also relevant because the urban temperatures are larger than rural ones.

Niyogi described the complex interactions between the four factors: "When temperature rises, you see more evaporation. More evaporation could lead to more clouds. More clouds might lead to changes in radiation. Changes in radiation can impact the amount of convection - the heating of the environment by the rising air. This leads to formation of rain, which can change the soil moisture and temperature again."

They studied two types of crops, corn and soybeans, in 25 different climate scenarios. They discovered that a certain level of solar radiation is good for the plants as it increases the efficiency of the photosynthesis. Radiation also influences the amount of evaporation and changes the plant's water usage, so there can be too much sun. The effects of temperature were found to be more significant than those of changes in radiation, but the impact depended on when temperature changes occurred and how long they lasted. The most important factor was precipitation.

"Right now, we would be in shock if we had a real drought in Indiana," Niyogi said. "We can avoid a drought disaster depending on how we manage our resources based on climate change impacts that consider multiple interactions and vulnerability."

Niyogi conclusion is that as the population increases, the demand for agriculture products also increases and regional climates change, management of resources will become even more important. The point is that in the end one cannot separate the issue of climate change of that of economics or vice-versa. One needs to take both into account and the debate should become less militant and personal and much more down to earth.